AS of Friday afternoon, the latest round of the ongoing Greek debt tragedy suggests that a further international financial meltdown, which some have argued had the potential to be another “Lehman” moment, is likely to be averted.

According to Austrian Finance Ministry official Thomas Wieser, Greece is likely to receive as much as 85 billion euros ($124 billion) in new financing, including a contribution from private investors, in a second bailout aimed at preventing default and ending the euro-region’s debt crisis. Euro-area nations and private investors will contribute 70 per cent of that aid, with the IMF offering the rest, and European Union finance chiefs will also hold a conference call tomorrow to free up a 12 billion euro payment overdue from the original rescue.

Greece’s ongoing debt negotiation is interesting because of the many similarities, and key differences, between a similar experience faced by Jamaica between July 2009 and January 2010.

Leaving aside the ongoing demonstrations in Greece for the moment, the renewed sense of crisis over the past several months has been driven by a complex negotiation between the reluctant paymaster Germany, the international rating agencies (particularly Standard and Poors), and the European Central Bank. Appropriately in view of the large holdings of Greek debt by German banks, we can quote from a research piece by one of Germany’s leading commercial banks, Commerzbank, on the issue.

Commerzbank outlines the three stringent conditions for S&P not to view a debt restructuring as a default.

Firstly, investors must not feel pressured by explicit or implicit coercion to participate in the exchange.

Secondly, the borrower should be able to make its debt service payments even in the absence of the exchange ie the proposed transaction should not be necessary to avoid default.

Thirdly, the terms of the transaction are arm’s length ie other investors would be willing to purchase the new securities at these terms if given the opportunity.

In essence, Greece faces exactly the same problem Jamaica faced in July 2009. At minimum, Greece needs a debt exchange to push out the maturities on the short term portion of its 300 billion Euro debt, over one third which matures in the next two years. However, Greece has already been sharply downgraded from ‘B’ to ‘CCC’ with a negative outlook. As was the case with Jamaica after it was downgraded in July 2009, viewed against S&P’s three conditions for a debt exchange to be classed as a default, the presumption for Greece is now that any proposed debt exchange is automatically distressed and not voluntary.

The picture is complicated by the fact that German public is tired of bailing out the countries in European periphery, particularly their caricature of the “lazy” Greeks. Germany has therefore been insisting that the banks and other investors that invested in Greek bonds should be “bailed in”, meaning that the private sector needs to make their contribution to the bailout of Greece.

Finally, the critical role of the European Central Bank (ECB) is central to this story. The European Central Bank has been lending on an enormous scale against the bonds of European countries, providing European banks with cash against the collateral of the bonds of the peripheral European countries such as Ireland, Portugal and particularly Greece. It has been in affect financing capital flight on a vast scale as Greek depositors flee Greek banks, fearing a hard Greek default (Greek bonds are now trading around 50 cents on the dollar) rendering Greek banks insolvent, and an associated return to the drachma as part of a further large devaluation.

The ECB has said it will stop financing the debt of countries that default, namely Greece, so the past several weeks have been an exercise of trying to square the circle of bailing in private sector creditors without triggering the category of default by the international rating agencies, which would render Greek debt as being ineligible to be financed by the ECB.

To resolve the crisis, in a measure that appears to be gaining traction, French banks have proposed that Greek private sector bondholders would agree to roll over 70 per cent of their debt maturing through mid-2014 into new 30-year Greek bonds with the principal on the new debt guaranteed through Greece investing in zero-coupon bonds of similar maturity. Under a second option, investors would roll over 90 per cent of their debt into new five-year bonds with no guarantee. This proposal has some of the features of the Brady bonds that eventually ended the Latin American banking crisis of the 1980’s, but so far without the principal reduction.

In Jamaica’s case, repeated rating agency downgrades and other financial pressures in the run up to the debt exchange had left Jamaica on the edge of a severe loss of confidence, potential capital flight, dollar weakness and further pressures on the local financial system.

However, unlike Greece, Jamaica had a sufficient national consensus to avoid a meltdown scenario. A critical difference is that even after severe cutbacks, Greece still runs a primary deficit, meaning that revenues are less than expenditure (even excluding interest costs). Jamaica runs a primary surplus, meaning that it can actually pay the interest on its debt, as long as the interest costs are not too high.